Protesters march on the End Poverty Now demonstration on the first day of the Republican national convention in Cleveland, Ohio.
Photograph: Jeff J Mitchell/Getty Images

‘America is already great” – the Democrats’ now preferred line – is an awkward catchphrase to use if you want to reach those Americans who face huge medical bills or student debts or those who are unemployed or fear for their homes being repossessed.

And this gets to the heart of the hard juggling act ahead for the Democrats in the election campaign. On the one hand, they have to argue for the achievements of President Obama’s last eight years and the recovery that we’ve seen. But, on the other, they also have to acknowledge that the economy wasn’t working well before 2008 and still doesn’t work well for everyday Americans now.

It’s a difficult needle to thread politically by itself, but will be harder with the Republican nominee, Donald Trump, making it the centrepiece of his campaign. His story of our endless decline has straightforward villains in the form of immigrants, trade, Muslims, “political correctness” and a story of redemption in his own business savvy.

Trump’s agenda has the double problem of being wrong and not practical, but what do the Democrats offer? If Democrats can become the party of optimism, they can broaden their appeal, yet last week’s convention only really tackled this deep economic problem as bookends.

The first night, dominated by the progressive wing of the party and headlined by Bernie Sanders, discussed it at length. The final speaker, Hillary Clinton taking the party’s nomination, also spoke to this, saying: “None of us can be satisfied with the status quo. Not by a long shot. We’re still facing deep-seated problems that developed long before the recession and have stayed with us through the recovery.”

But a viewer wouldn’t have seen a clear articulation of what went wrong and how to fix it. Still, for those watching closely, there has been a change in the way Democrats think about the economy.

Call it the New Liberal Economics. It comes with three parts. First is seeing inequality as created by the rules of the market rather than abstract forces. Building out a view of the labour market that is struggling from secular stagnation, a new demand-side focus to replace the supply-side obsession of the past decades, is the second thread. Finally, there’s a focus on providing economic security, both for families and for access to crucial goods, through a more active role for the state.

It points to a more muscular role for the state than we’ve seen in Democratic politics of the past decades. But it’s built out of the failures of the old paradigm to explain what’s gone wrong and the primaries have shown that these arguments are gaining strength.

The rich get richer

Inequality has rocketed over the past generation and the share of income going to the top 1% has doubled over the past several decades and remains at high levels even in the aftermath of the financial crisis. The amount of the economy capital owners take home has also gone up and corporate profits have soared in the years since the great recession. Perhaps if the rest of the workforce had gained in this prosperity we wouldn’t worry, yet real median wages are still where they were 16 years ago.

The previous received centrist wisdom was that this was the result of natural market forces and that any attempts to challenge it would only make things worse. The term “neoliberalism” gets abused, but it does reflect an elite consensus, one born in reaction to the economic crises of the 1970s that was centred around tighter money, deregulation, privatisation, the expansion of financial sector, balanced budgets. As Bill Clinton had put it, it was about the era of big government being over. It’s this period of great moderation that is now over.

Instead of inevitable forces, the New Liberal Economics argues that these changes are the result of the changing rules of the economy. The way that markets are structured and enforced, what the Roosevelt Institute calls the “rules” of the economy, are powerful determinants of who the economy works for.

Starting in the late 1970s, these rules were rewritten or allowed to drift away from their original purpose. This has led to rising inequality, with no rapid growth to show for it.

This is most obvious in the financial sector. The growth rate of finance doubled, starting with the rollbacks of the 1980s, with compensation closely tracking deregulatory efforts. Rules were ignored or overruled when it came to combating predatory lending, lending that devastated, for instance, communities of colour. During the debates, Bernie Sanders pushed for breaking apart the largest institutions and Hillary Clinton for casting a wider net across all financial activities.

Bernie Sanders listens as Hillary Clinton speaks during final day of the Democratic national convention. Photograph: Tannen Maury/EPA

But this economics also looks to the power of finance over the real economy. The rules of the economy were rewritten to give more power to shareholders and CEOs, changing the nature of the firm and whom it works for. With payouts to shareholders across the corporate sector equal to all corporate profits, this leads to weaker investment and declining innovation.

This resulting short-termism was a major focus of Hillary Clinton’s economic agenda, with Clinton noting in a speech that it would have eliminated many of our great previous inventions: “What if an activist hedge fund had persuaded AT&T to maximise cash flow and close Bell Labs before the transistor or the laser was invented there?”

This new approach is also looking at monopoly power. Starting in the early 1980s, there was a conscious move towards taking a more lenient approach towards antitrust, with a stronger presumption that mergers should go through. This has changed the nature of our corporate sector. Last year, the Council of Economic Advisers, a thinktank within the White House, released a report noting the increasing concentration of power in large sectors of the economy. Worse, these firms were more likely to be persistently profitable than in the decades before. And it continues. The recovery from the great recession involved massive waves of buyouts and mergers to the tune of trillions of dollars, even as overall corporate investment remained the weakest of any postwar recovery.

Campaign finance is the glue that holds many of these concerns together. There’s no way around having rules of the market economy; the idea of free markets is a question-begging exercise that has no answer. So ensuring that there’s accountability is essential, preventing corporate money from influencing the rules. It’s why Citizens United has become a focal point, with both primary candidates having promised to appoint judges who would overturn the decision.

Real world economics

Yet the real focus for everyday people are the jobs they have or fail to find and the pay they take home. And working provides much less for people than it has in the past. The old consensus, formed out of the great moderation, was that people would always be able to work and that any problems could be reducible to more education, training and skills. The real driver of wages was an ability to manipulate new technologies, particularly those around information and computing.

This consensus was falling apart even before the great recession. High- and low-skill workers saw their wages diverge most in the 1980s, not the technologically booming 1990s and 2000s. It could never explain the racial and gender wage gaps. By the time of the financial crisis, the higher education premium had stalled; rather than moving up into better jobs, higher-skilled workers were simply taking lower-skilled jobs from people with less education.

Whereas supply-side economics dominated the thinking of the 1980s, a new demand-side economics is coming to define our times. The new liberal economics looks at persistent demand shortfalls to explain the weakness of the labour market. Our situation, often called “secular stagnation”, points to the persistence of low interest rates alongside falling inflation as the main problems of our era.

It combines with the monopoly problem mentioned above. As former treasury secretary Larry Summers has written: “If monopoly power increased, one would expect to see higher profits, lower investment as firms restricted output and lower interest rates as the demand for capital was reduced. This is exactly what we have seen in recent years.”

This has large consequences for everyday workers, especially communities of colour that are hit the hardest and have the weakest recoveries. It is not only more difficult for people to find jobs, but also for people to transfer jobs.

Wages for people who switch jobs aren’t increasing, making it much harder for people to climb a job ladder to build their careers. It also helps explain why young people are so liberal. Their entire adult careers have been formed in periods of few precarious jobs, rather than periods when work was more available.

This has pushed the debate towards full employment and away from austerity. Both candidates talked about reforming the Federal Reserve so it served workers rather than just finance.And the intense debate between a $12 and a $15 minimum wage masked the fact that for decades a high minimum wage had fallen out of intellectual fashion, with a focus on tax credits to boost wages instead. But the new mood is also apparent from what was missing: there were no calls for debt scaremongering during the primary season.Where deficit hawks were claiming we’d face a financial crisis from our deficits by 2013, it’s now three years later and interest rates and inflation remain at very low rates with no crisis in sight Even former deficit hawks like the IMF are arguing that it would be counterproductive for a country like the United States to try and reduce the national debt. This influences calls for more infrastructure while we still have idle resources, which is one of the major points from the Clinton campaign.

Real, active government

The argument that seals the new economics is that government will now have to play a more muscular role in providing economic security for families and for the key goods that define a secure economic life – health, retirement and education. There is also an increasing realisation that the market alone is failing to provide certain key goods and that the state should provide them in public options.

The second day of the Democratic convention was dedicated to “A Lifetime of Fighting for Children and Families” and it is clear where the immediate priorities will be. Liberals in the Senate have introduced legislation for 12 weeks of paid family leave. Universal pre-kindergarten has also been built up as part of the platform.

That’s an agenda that’s ready to go. Meanwhile, liberal thinktanks such as the Century Foundation and Center for American Progress are increasingly focused on a refundable child tax credit to provide a basic income for children. By directly giving parents money, it would make a major dent in childhood poverty. Though not discussed as part of the primary, there’s plenty of international experience to build on.

Meanwhile, the Democratic consensus is moving towards the idea that for key goods that provide economic security, such as retirement, education and healthcare, there needs to be more public provisioning and public options. Clinton moved in this direction during the primary, promising to expand social security and create a public option for the Affordable Care Act’s healthcare exchanges (both moves President Obama joined, and also added a plan for free public college for middle-class families).

This is a distinct move away from an older consensus of trying to “nudge” individuals and companies to be able to provide these services. Decades of attempts have largely failed. Tax credits for private retirement accounts overwhelming go to the rich and don’t even encourage them to save more. State disinvestment from public colleges has sent student loans soaring. And there remains doubts over whether or not all areas of the country will have sufficient private insurers available for the healthcare exchanges. Direct public provisioning counters all these.

However, like any political consensus, the New Liberal Economics is full of contradictions and uneasy alliances. The agenda will sound different pitched to suburban women than to recent immigrants. There are nicer versions focused on investing in families and communities and more aggressive ones focused on tackling the power of the 1%. There are those for whom eliminating poverty is essential and others who think making goods genuinely free and work more dignified has political priority. But they hang together in these three overlapping focuses.

This is not new. The New Deal contained contradictions from the beginning, with wings dedicated to direct economic planning conflicting with those looking to manage the economy. The Progressives were a walking list of contradictions, with reform-minded business leaders working with and against Christian socialists and a new professional class. But, like now, there’s a set of shared convictions over what has gone wrong and how to start moving to get it working again.

There are elements that could be here but aren’t, parts that are missing as a result of the Obama presidency. The confident Keynesian management and rhetoric that was prevalent in mid-century liberalism isn’t back, gone alongside the public perceptions that the stimulus failed. Our expansive monetary and fiscal policies, along with limited self-defeating efforts to try to reduce the debt in the short term, have given us a better recovery than Europe though. President Obama’s promise not to raise taxes on the middle class, even though the expiration of George W Bush’s tax cuts gave him an easy opportunity to do so, has made it harder to argue for everyone to pay more to get more from the government.

Can it stop Trump? It can certainly put his economic agenda into check. Voters will be amazed that a Republican candidate is talking about the 47% of Americans (those in receipt of welfare of some sort) as something worth fighting for rather than objects of contempt. But Trump is running a smoke-and-mirrors campaign. He will have traction as long as he’s the only one with a diagnosis of what went wrong. Luckily, liberals have put together a better story.

Mike Konczal is a fellow with the Roosevelt Institute in New York. His blog, Rortybomb, was named one of the 25 best financial blogs by Time